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Why ‘no’ to the Eurasian Customs Union

Nino Evgenidze is Executive Director of the Economic Policy Research Center.

“The Eurasian Customs Union in the framework of Eurasian Economic Development” – the name of this union mainly has an economic connotation to it. However, everyone agrees that its main goal is political. Spheres of competence of the union prove this argument:

Cooperation in the defense sector among the member states on the basis of the Collective Security Treaty Organization (CSTO). Creation of common military and police forces for internal conflict resolution. The defense center of the Eurasian Union is Moscow.

Common Parliament and Executive bodies;

Common currency by 2022 (most probably the Russian Ruble);

Coordinating foreign policy with the Russian Federation;

Common Educational Space;

Common Banking Space;

Common Customs and Economic Space.

However, due to the profile of our organization – Economic Policy Research Center, we will place emphasis on the economic aspects of the Union. Today, supporters of the Eurasian Union stress economic benefits of the membership. That is, benefits that the Russian market will bring to the Georgian production and to economic development. We will analyze the expectations and real perspectives in further details:

As of today, the Eurasian Customs Union is a form of economic integration of Belarus, Kazakhstan and Russia. It envisages the creation of a “common customs space, without export taxes and economic limitations among the members states”. Although, “member countries can apply special protective, anti-dumping and compensation activities when needed.”

Georgia was a member of the Commonwealth of Independent States, CIS, when an economic embargo went into force in 2006 (but left in 2008 after the war). Moreover, this embargo was connected to food safety measures. This is a good example to realize that membership of the Eurasian Union is no guarantee that Georgian production will not become part of the “special protective” sanctions, as written in the Union’s statements. Moreover, we believe that these types of exceptions are envisaged for countries like Georgia.

Besides, Georgia will have to give preference to importing production from Russia and other member states; Nowadays, the majority of these goods are currently substituted by Turkish, Chinese and others. As a result, competition will be distorted in Georgia, followed by an increase in prices and a decrease in the quality of production available. Prices for the products coming from non-member states might become inadequately expensive due to differences in customs regimes. Therefore, we will face a situation similar to the one in the Soviet Union when the population of Georgia will have to choose between production from Russia or other Eurasian member states, and extremely expensive goods imported from other countries.

This perspective might not sound feasible in the 21st century, especially when both Georgia and Russia are members of WTO. However, the perspective might not be so unreal after all, especially when going through the Union documents:

“Members of the Union use the same tariffs and regulations when trading with third countries”.

By joining the Eurasian Customs Union Georgia might have to say no to the acquired preferences on the world markets, or the ones that are yet to be acquired such as the deep and comprehensive free trade agreement (DCFTA) with the EU. Placing member countries on equal conditions is a request from the Eurasian Customs Union, and on the other hand a prerequisite of the EU. That is, membership of the Union is not compatible with the European integration process.

Since we place emphasis on the economic feasibility/reasonability, below we briefly discuss those trade regimes/preferences that Georgia currently enjoys and that might be jeopardized by entering the Eurasian Customs Union:

Most Favored Nation

Majority of Georgia’s trade partners are members of WTO and therefore trade relations with those 158 countries are based on the principles of “most favored nation regime” (MFN).

Generalized System of Preferences – (GSP)

Essence of GSP is low import tariff to the beneficiary countries, that will foster access of the developing countries to the markets of the developed countries.

GSP +

As of today Georgia enjoys a GSP + trade regime with EU; up to 7200 types of Georgian products can enter EU market with zero customs tax;

Entering the Eurasian Customs Union will at minimum jeopardize the free trade agreement that the country enjoys with Turkey. The Turkish market will no longer be accessible for Georgia on the old terms.

It should be noted that Georgia is unable to use many of the benefits and preferential treatments as of today. However, the potential is huge and if the approach is correct these preferences can be used for the economic development of the country.

In case the country signs DCFTA, Georgia will be able to export goods and services to the EU market, the country will develop trade related mechanisms. Free, stable and predictable environment will be fostered, thus increasing FDI from European countries. Entering the common European economic space will place Georgian goods on the same terms as local, European products. For this to happen, Georgian products have to satisfy strict European requirements, which is a hard and lengthy process, however ultimately will increase the quality of goods produced in the country and hence their expert potential. The European market counts about 480 million consumers, and has a GDP of over 16 trillion euro. It is forecasted that if a DCFTA is signed, Georgian export to the EU will increase by minimum 12%, while imports from EU by 7.5%.

Will the Eurasian Customs Union be able to outweigh the benefits that Georgia currently enjoys or will have in the nearest future? How beneficial will even the opening up of the Russian market be for Georgia?

In 2005, before the Russian embargo, when Georgia was still a member of CIS, Georgia’s export to EU countries considerably exceeded its export to Russia. That is, export in monetary terms to EU countries was 216 million USD, while export to Russia was only 153 million USD. Georgian export to Turkey, a major trade partner, was slightly less than that to Russia.

It is worthy noting that after the Russian embargo, as of today, Georgian export to CIS countries has increased fourfold – from 241 million to 778 million, and is more than before embargo Russian export volume 5 times.

This means that Georgia managed to diversify its markets, find new ones, increase production and its degree of competitiveness. These figures give us an overall idea of what Georgia might lose if it chooses the Eurasian Customs Union membership over European integration and plays by the rules set by Russia. Georgia will get the Russian market with the rules set by Russia and will lose all achievements and progress it has made in the past decade on the international market, together with financial and economic independence.

The Eurasian Customs Union is a trade and economic union based on a geographical area. Limiting trade by geographical area will not be profitable in any case. The EU and other WTO countries represent far better opportunities for Georgia. From an economic viewpoint, entering a more limited economic space and strict trade regimes is nonsense, especially under conditions of globalization. Isolation will not a viable choice for a country like Georgia that is currently integrated in the world trade.